Do you have enough life insurance?

Will your survivors live the same lifestyle?

Last updated: 06 February 2015

There are a lot of warnings out
there about Australians not
having enough life insurance
or related types of cover. A lot of those warnings are coming from
the insurance industry itself, but that's no reason to dismiss them.

Falling short

The online insurance information
service Lifewise cites survey data showing that half of industry
superannuation fund members need
at least $100,000 more life insurance cover
than they currently have. "Australia
has proved to be one of the most
under-insured nations in the developed
world," Lifewise concludes.

The survey also yielded a few
other troubling facts about industry
fund members:

74% are under-insured by $100,000 for
total and permanent disability (TPD).

45% are under-insured by $1000
a month for income protection.

They would say that,
wouldn't they?

It's worth noting that Lifewise is an initiative of the Australian life insurance industry. And the data they cited came from a 2008 survey arranged by two other financial services industry heavyweights: the Australian Institute of Superannuation Trustees and Industry Funds Forum. It's also worth noting that financial adviser commissions for
life insurance products are among
the highest – generally between 90% and
110% of the first premium payment and
up to 13% of annual premium payments
until the policy matures.

So, are we really dangerously
under-insured, or is this just a
case of the insurance industry
scaring us into buying more
insurance?

The perception
that the industry is spruiking
its products was recently
raised by Brett Clark, CEO of
insurance broker TAL Life, who
told the industry website riskinfo.com.au that messages "which appear
to be very self-serving" aren't helping
the under-insurance problem.

Two more recent research projects
suggest the industry has a point. A
KPMG report found 55% of Australian
employees were under-insured to the tune
of a collective $304bn – or 63% short of
the coverage we should have. But once
again, the report was commissioned by
the Financial Services Council, which
represents financial services providers,
including insurance companies.

An independent view

A Rice Warner report released in
November 2013 backs up the KPMG
findings, saying that unless you have a
payout of close to a million dollars lined
up, you may be under-insured if you want
your dependents to be able to maintain
their standard of living.

Rice Warner's
report was independently produced,
"without funding or influence from
the insurance industry", a spokesperson told us. While the report shows the life
insurance gap has significantly narrowed
over the previous nine years, particularly
for lower-income workers, it also says "the
median level of cover is still only 64% of
basic needs and 42% of the amount
required to ensure that family members
and dependents can maintain their
standard of living after the death of a
parent or partner".

The Rice Warner researchers
had a few recommendations for the super industry as well
as the government to reduce
what they call "glaring
distortions and inequities"
in the insurance market.
Recommendations for the super
industry include:

State governments should remove
stamp duty from life, income and TPD
protections provided by general insurers.

Remove GST on income protection
and TPD insurance provided by
general insurers.

Equalise the tax treatment of risk
insurance inside and outside
of superannuation.

Rice Warner crunched the numbers for average family scenarios.

*Source: Rice Warner

Bailing out too soon?

Research by Asteron Life (part of the
Suncorp group) in 2013 suggested that
Australians let their life insurance policies
and related cover lapse about five years
too soon, and that the vast majority of
trauma, income protection and TPD
claims are made by people in their 40s.

The average age at which Australians
let their cover lapse is 44, Asteron says,
while the average age at which claims
are made is 49.

Five things you need to know about life insurance

Duty of disclosure

Insurance
claims can be knocked back
if you fail to disclose everything
to the insurer. This includes
information such as being a
heavy smoker, being involved in
risky sports or activities, having a
serious health issue or a terminal
illness, drug use or having a
mental health condition. You can
still likely get cover if you have a
pre-existing condition, but you
may have to pay more for it.

Work or recreational risk

Some work or recreational activities are considered high risk by insurers and may affect your application for life insurance – but you still need to tell them about it. You'll still be able to get cover if you work in a dangerous working environment such as mining or construction, or are into bungee jumping or car racing, but be prepared to pay more for it. If you fail to divulge such details and meet your fate while involved in one of these risky activities, your beneficiaries may be left empty-handed.

Update your details

It's all too easy to buy life insurance – or have it as a
default inclusion with your super account – and then forget about it. But
you should always keep an eye on your level of cover. If you take
out a policy and then have children, move
house or get a better-paying job, you may
become under-insured if you don't make
a change.

It's also important to let
your beneficiaries know you have
a policy and how to the contact
the provider in the event of
your death. ASIC holds
unclaimed life money due
from insurance companies
or friendly societies for three
years after the policy matures.
ASIC's Unclaimed Money Search
database goes back to 1952 for
life insurance companies, and
back to 2000 for friendly societies.

Understand your policy

Every life insurance policy
has its own inclusions and
exclusions, so make sure you read
and understand the policy
documents or product disclosure
statement (PDS). It's generally not
good to wait to find out what is and
isn't covered until after you file a
claim.

If you're covered under a
group insurance plan through
your superannuation fund, ASIC
requires the fund to make your
insurance benefits clear.

Binding nomination vs
preferred beneficiary

For life
insurance inside superannuation
accounts, it's important to make a
binding nomination regarding who'll receive the proceeds when
the policy matures (i.e. when you
die or are incapacitated). The
alternative to this is naming a
preferred beneficiary. In this case,
the super fund manager can
investigate to make sure there are
no other eligible recipients, such
as a former spouse.